Broker’s Plea is Good News for Victims Who are Suing

Frank Gruttadauria’s plea agreement will pave the way for settlements, jury verdicts and arbitration awards in favor of his victims, several securities law experts said yesterday.

The former high-rolling Cleveland stockbroker has agreed to plead guilty to four criminal charges in one of the nation’s largest cases of fraud involving an individual broker.

At least a dozen of his 50 victims have filed legal claims against and SG Cowen Corp., where Gruttadauria had worked for 12 years until January, when he disappeared after confessing to a 15-year fraud spree. Investors believed they had a combined $277 million, when their combined accounts actually only contained $1.8 million.

Philip Aidikoff, president of the Public Investors Arbitration Bar Association, said the plea bargain digs a big hole for Lehman and Cowen.

“The claims are certainly strengthened by any plea he takes,” said Aidikoff, a California lawyer who has no clients in the case. “It’s going to be very difficult for either brokerage firm to defend this based on his admission. . . . The brokerages can’t possibly with a straight face say, ‘We shouldn’t have or couldn’t have known.’ “

Chicago securities lawyer Andrew Stoltmann agreed that Gruttadauria’s former employers must be cringing. To get such a short sentence, he said, Gruttadauria would have to be cooperating fully with authorities.

“He’s going to end up selling out the brokerage firms,” Stoltmann said.

Investors are suing the two firms in civil lawsuits and arbitration cases, alleging they were negligent and are liable for money lost plus punitive damages.

Lehman spokeswoman Hannah Burns declined to comment on the plea agreement or its possible impact on the civil cases. The firm has paid out about $20 million to numerous investors, as goodwill gestures, not as legal settlements.

Cleveland securities attorney Karl May, who represents two Gruttadauria employees fired after the scandal surfaced, said Gruttadauria has detailed for authorities exactly how much he took and how he pulled it off under the brokerages’ noses.

That information will be ammunition for investors, he said.

“Plus, now he’s perfectly free to testify,” May said. “Before, he might have taken the Fifth.”

Colorado attorney Tracy Pride Stoneman, who represents former Cleveland businessman Charles Ruffing, said the pending guilty plea will help everyone’s case against the brokerages.

Stoneman said that some attorneys representing other Gruttadauria victims have told her that the brokerages, in their initial responses to the suits, blamed investors for their losses.

“This waters down some of the arguments the firms were making that the investors were to blame,” she said, chuckling.

Stoneman said the brokerages are ultimately responsible for Gruttadauria’s conduct as an employee, and this guilty plea proves that his conduct was wrong.

“This clears the way for the real issues,” she said.

Stoltmann said juries and arbitration panels “absolutely” would be swayed by Gruttadauria’s confession.

“This guy is going to jail and that’s always a good fact,” Stoltmann said.

He added that Lehman’s and Cowen’s attorneys almost surely will try to get Gruttadauria’s guilty plea declared inadmissible in legal proceedings against the firms, “but I don’t think there’s any chance of that.”

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